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By Gary Newman | Monday 24 December 2018
Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
Between now and January 2nd we shall be publishing more than 20 share tips of the year – buys and sells. We kick off with one from Gary Newman
Oil has taken a bit of a hammering recently but I can’t really see any reason to completely ignore the sector, so the first of my share picks for 2019 is a buy for SOCO International (SIA).
This is a company where I do hold some shares myself and I am planning to buy more in the near future – pretty much as soon as oil shows any sign of reversing the current downwards trend.
To minimise risk, I’m looking for companies that generate free cash flow and make a net profit, whilst at the same time avoiding those that are drowning in debt, just in case we do see a longer period of weaker oil prices.
SOCO fits the bill on both fronts, plus there is plenty of growth potential moving forwards, as over the next few years production is forecast to double following the ongoing acquisition of Merlon Petroleum and its producing El Fayum asset in Egypt, and alongside the existing assets in Vietnam, overall production is likely to hit circa 23,000boepd by 2023 – and that is assuming no further increases in the 7,900boepd currently coming from Vietnam.
El Fayum is low cost at just $6/barrel, and the deal will see SOCO adding 24 million barrels of 2P reserves, with further potential from the 37 million barrels of 2C resources that it has, and which can potentially be converted to reserves further down the line.
This deal will cost SOCO $215 million, of which $136 million is in cash, with the rest in shares, and although you could argue that the deal has been agreed when the oil price was high, I can still see value at less than $10 per barrel of 2P reserves.
This diversification reduces risk to some extent as the new asset is ion a very different area geographically and will be funded from existing cash reserves which stood at $128 million at the end of June, and additionally it has now secured a reserves based lending facility of $125 million, so the balance sheet is strong.
It isn’t one of the more popular AIM shares, but that can quickly change, and given that it pays a dividend – 5.25p per share for 2017, which gives a good yield at the current share price – and had a net asset value of $476 million pre the Merlon acquisition, it is hard to find a reason not to like this one, barring a collapse in oil prices.
The shares price is now c71p with a market cap of just £241 million, so I can see plenty of value in this one as a longer term investment.
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